SEC on verge of modernizing oil-reserve accounting rules

IanTalley

WASHINGTON (MarketWatch) -- U.S. regulators are on the verge of modernizing oil and gas reserve accounting rules that could revalue much of the petroleum sector.

The Securities Exchange Commission finished posting public comments on Wednesday, which overwhelmingly support the agency's proposed rules revisions that were based on recommendations made by the petroleum industry.

If the SEC moves ahead with its proposals, as industry insiders predict, it would the first time in several decades the commission has updated its reserve accounting rules. Modernized rules would create consistent valuation standards for unconventional resources such as tar sands and hard-to-produce natural gas.

This could allow some companies to declare themselves to be more valuable since they could officially book billions of barrels in tar sands or billions of cubic feet of natural gas reserves. The rules would take into account new technology and recovery methods.

It would also bring closure to a long-running dispute between the industry and the SEC over anachronistic guidelines.

Reserves accounting is a key investor metric to valuing petroleum businesses. As traditional resources are more scarce and more difficult to find or develop because of limited geopolitical access, companies have been turning to unconventional oil and gas deposits. Oil prices at record levels also have made expensive, unconventional projects now viable.

Companies weren't allowed by SEC to book many of those resources under the old rules, last updated in 1982. As a result, many companies were understating their reserves to the SEC and giving their own account directly to investors.

The SEC staff has yet to officially propose the new rules to the commission for approval. Yet industry officials say the the SEC's concept paper outlining possible revisions to reserve regulations, plus public comments urging the SEC to modernize, indicates there will be an imminent rule change.

"They wouldn't have opened the door if they were not, at a minimum, contemplating expanding the definitions," said Donald Juckett, the founding director of the American Association of Petroleum Geologists' Geoscience and Energy Office.

SEC Commissioners Kathleen Casey and Annette Nazareth said, when the concept paper was published in December, that regulators would do well to take a less prescriptive approach to reserves. That would mean companies could benefit from future developments and technologies - such as three- and four-dimensional seismic surveys - to locate and extract oil and gas. SEC finance division director John White also agreed existing rules meant many companies were under-reporting reserves.

The AAPG, along with the Society of Petroleum Engineers and several other industry organizations, crafted a set of international standards that the SEC used for its concept paper.

Juckett says the new rules wouldn't only expand for many companies the public statement of reserves reported to the SEC but also give the investor community greater certainty and transparency in judging reserve estimates.

"It will be much more difficult to manipulate the rules with this new system," Juckett said.

Guy Caruso, head of the the U.S. Energy Information Administration, recommended the SEC update its rules because they wouldn't only prevent the distortions currently seen in reserve valuations but also allow more accurate surveys of domestic resources.

The issue flared when, in 2004, Royal Dutch Shell PLC
RDS.A, -0.46%
recategorized nearly 20% of its proved reserves, or about 3.9 billion barrels of oil equivalent. The restatement, prompted by an aggressive SEC probe, led to the resignation of then Shell Chief Executive Philip Watts.

Watts was one of many in the oil industry, including executives from StatoilHydro ASA
STO, -1.25%
Total SA (TOT), CNOOC Ltd.
CEO, +0.60%
ENI SpA
E, -1.24%
Devon Energy Corp.
DVN, -1.57%
and a raft of other industry executives and analysts, that urged the government to approve updated rules.

Watts lawyer says that new rules, if the SEC had heeded Shell's input on reserves during the recategorization scandal, would have dramatically changed not only the amount of reserve restatement but also the censuring nature of the probe. Although Watts stepped down following the fiasco, the SEC decided to end its investigation of the former Shell CEO without enforcement action.

The new rules could allow companies such as Shell to officially book billions of barrels of new oil sands and other unconventional resources. In its 2006 annual report, for example, the company said it had nearly 1.134 billion barrels of oil equivalent that it couldn't book with the SEC, primarily from its Athabasca and Peace River projects. The company says there is almost 10 billion barrels of oil equivalent in place at its Athabasca project alone.

The new guidelines could also help more accurately report the value of tar sands, or bitumen, by allowing companies to assess their assets at sale value. Current valuing of bitumen is based at year-end levels - when prices are typically at their lowest because of their link to asphalt demand.

Many of the oil companies, such as BP PLC
BP, -0.55%
recommended the SEC use principles-based definitions of proved reserves and abort its rules-based definitions and staff interpretation, which they believe limit accurate accounting.

"We believe that a progressive update is preferable to a significant change in the overall disclosure framework," BP Chief Financial Officer Byron Grote wrote in a Feb. 18 letter to the SEC. "Generally, it is the interpretive guidance which has not kept pace with industry changes," Grote said.

While BP wanted the SEC to only allow proved resources, StatoilHydro's CFO Eldar Saetre said in a letter that the regulator should also allow companies to report contingent resources, an indication to the market of the potential for future development.

SEC spokesman John Nester couldn't say how long it would take SEC staff to review the public comments and continue the possible rule-making process.

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